Canada's new geopolitics: when a green country becomes a petroleum country

Roberto DE PRIMIS, Guest Researcher at ESISC

02 July 2008

Canada has always projected an image of a green country with vast open spaces and with politicians supporting the environment and sustainable development. Nonetheless, since the beginning of the new millennium gigantic reserves of heavy oil coming from bituminous sands in the province of Alberta[1] have been promoted commercially by the large worldwide energy companies. Canada now has the world’s second largest proven oil reserves, just behind Saudi Arabia. The geopolitical implications resulting from this fact have transformed the bilateral relations with its American neighbour and modified its international posture with respect to such strategic challenges as the Kyoto Protocol.

The bituminous or ‘oil-bearing’ sands are what underlies this quiet revolution that no one has spoken about for a long time. It is thus essential to explain what these sands are and how they can be used before analysing 21st century Canada.

Bituminous sands

Bitumen extracted from oil-bearing sands was discovered at the end of the 18th century and was used at the start of the 20th century to re-surface the roads of the province of Alberta. It was only in the 1930s that scientists developed the possibility of using chemical techniques to extract oil from it. This discovery touched off an industrial boom in the region and modified the geopolitics of Canada.

Over these past few years, many factors have influenced the promotion of the bituminous sands [2] :

the development of markets and pipelines ;

the high price of crude;

the rise in energy demand at the worldwide level;

technological innovations as well as the stable investment climate in Canada.

Techniques for oil recovery

Oil-bearing sands are a mixture of sand, bitumen and clay surrounded by a film of water. The bitumen is deposited on this layer of water. Much heavier than what is extracted from deposits elsewhere in the world, this type of oil has to undergo a certain number of refinery operations to be usable. In other words, this oil is not extracted from the subsoil by a conventional system of pumping but by an excavation technique (like open-pit mining) on a large scale, followed by intensive chemical treatment in an industrial plant. The bitumen which is produced is a mixture of solid or liquid hydrocarbons, high-density, thick and viscous.

At first you thus have to cut down the Northern forest and remove the layer of humus which covers the ground. Then enormous machines extract the oil-bearing sand which is then dumped into giant lorries for removal to plants where the mineral resources are processed in order to extract the bitumen. Since this type of hydrocarbon is too viscous, it is impossible to move it by means of classical type pipelines without first processing it.

At the present time, there are three types of extraction used[3], depending essentially on the depth of the deposits.

1) Extraction using water and steam

When heavy oil is on the surface or buried at a shallow depth, it is extracted and processed with hot water, which separates out the components and causes the sand to fall to the bottom of the container while releasing the bituminous elements to float away thanks to the difference in density of the various substances present.[4]

The trouble with this procedure is that the water separates out the elements but leaves other components in the bitumen such as sandy residue and you have to apply very corrosive chemicals in a new refining stage at an industrial plant for this to be usable. This technique requires the use of huge mechanical diggers for the vast mass of sand to be taken by giant lorries to industrial plants located several kilometres from the sites.

2) Extraction of the bitumen by ‘destructive distillation’

When heat is applied to the bituminous sands (500° C), the bitumen breaks down into small hydrocarbon molecules which easily separate from the sand.

This method, which is the least commonly used, requires less water but much more energy, all of which renders the cost/profit ration very disadvantageous.

3) Extraction in situ

This technique, which was already adopted to extract conventional oil, was tested in Texas and California. Used when deposits are buried at a depth of more than 75 metres, it consists of injecting low pressure steam into the ground with the help of vertical tubes. The increase in the temperature of the bitumen leads to a reduction in its viscosity. As soon as the heat takes effect, liquefied oil is pumped to the surface and sent to the plant for chemical processing. Though this technique works well, it requires a large amount of energy (gas and oil) and thus entails a cost for the producers.

Whichever technique is used, each barrel of oil coming from bituminous sands requires processing of 2 tonnes of earth, 300 litres of water and a significant amount of energy. In other words, to produce one barrel you have to spend 1/3 of a barrel of energy in order to heat the water and refine the crude.

Before undergoing a complex and expensive processing, the unimproved bitumen has a value much below that of classic light crude. An investigation carried out in 1993 by the National Energy Office of Canada[5] stated back then that the price of oil would have to rise for the production of bitumen to be profitable.[6]

Canada, a new energy power

The first commercial operations using oil-bearing sands saw the light of day during the 1960s and 1970s. But it was only when the price of a barrel of black gold reached a certain level of profitability compared to the costs of bituminous sands that production of this heavy oil aroused the interest of the main energy companies.

Thirty years after some investments were made in the region, the bituminous sands are beginning to look like gold. The costs linked to their production have been considerably reduced over the course of several decades, while the price of a barrel of oil has not stopped rising, so that exploitation of this resource has become a veritable godsend.

Back in the month of June 2001, the freshly reelected Prime Minister of Alberta, Ralph Klein, went to Washington to sell his oil there and above all to inform the American authorities of the extent of the reserves and the possibilities of importing hydrocarbons.

Beginning in this period, the ‘Alberta establishment’ led by Klein opened the gas and oil taps towards their neighbour in the South and began to rake in a colossal fortune. Around the year 2000, the price of a barrel of oil rose above 30 US dollars and profitability became possible.

In 2008, Canada can boast that it has the world’s second largest reserve of oil after Saudi Arabia. Indeed, according to official figures, the volume of natural bitumen extractable in the Alberta region borders on 175 billion barrels,[7] whereas the Saudis have the equivalent of 264 billion barrels.[8] The difference between these two nations is that Canadian oil costs between 25 and 35 American dollars while Saudi oil varies between 1 and 5 dollars.[9]

The extravagant figures on Canadian petroleum reserves as well as the colossal profits that they may give rise to have attracted the largest petroleum companies both for refining and for marketing and sales: Chevron, Husky Energy, Esso, North Atlantic, Nova Chemicals, Parkland Income, Petro-Canada, Shell Canada, Suncor, Ultramar, BP, Total etc. Whereas only Canadians were present at the beginning, the ‘foreign majors’ entered the race towards the year 2000. Shell Canada (the subsidiary of the Anglo-Dutch group) decided to invest 2.2 billion Euros beginning in 1999 and since then has been bought out by the mother company, which spent 5 billion Euros to take over 22% of capital of its subsidiary. This operation by the directors in London and Amsterdam was dictated by the colossal profits (on the order of more than 56%/year) reaped in a short period of time.

As regards Total, it put its bets on the heavy oil from Alberta beginning in 2005 with excellent results from its participation in local companies. In April 2008, the Canadian subsidiary of Total, Total E&P Canada, decided to increase its presence in the region by buying the company Synenco Energy for 300 million Euros.

The question of Canadian oil has become so strategic and sensitive that Al-Qaeda decided seize hold of it. Indeed, at the end of 2007 the Canadian Security Intelligence Service (SCRS)[10] published an alert emphasizing that for the first time the terrorist group had placed the oil interests of this country on the list of its potential targets for a future attack.[11] Formerly only oil interests in the Middle East supplying the United States figured on this list. Earlier attempted attacks against oil interests were carried out in Saudi Arabia in 2004[12] and in 2006[13], but did not really cause any substantial damage to the infrastructures. At the present time, Mexico and Venezuela are also cited in this list of countries at risk.

The maple tree country has 19 refineries in operation, mainly in Sarnia, Edmonton and Montreal. However, the network of gas and oil pipelines extends over some 45 000 km from east to west, with a hook in the region of the Great Lakes, Chicago as well as the American West. In 2006, this network transported gas and oil with a total value of 70 billion Euros.[14]

For several years now these strategic stakes have not failed to arouse the interest of the Chinese, the Indians and the Americans. The main Chinese companies have opened offices in Calgary and are beginning to invest in local companies in order to be able to have access to heavy oil supplies.

Well before the arrival of Bush and Cheney in the White House, the United States knew that supplying energy to the Chinese would inevitably, in the long run, enter into conflict with their own supplies. Beginning in 2002, China, which bypassed Japan as a consumer of black gold, attacked the market of oil sands via the Chinese National Offshore Oil Corporation Ltd (CNOOC). Since the United States had taken control of the major part of export of oil extracted from bituminous sands, friction could develop between Beijing and Washington, because every barrel exported to China means a barrel less available for use in the United States.

Canada thus remains the only industrialised country to have lined up more than 8 straight years of budget surpluses and its situation is the envy of other G8 countries. This prosperity comes from natural resources. It means that the explosion in the price of oil and metals results in inflating the coffers of the authorities in Ottawa. This situation is similar to the one in Moscow, A state living off of capital thanks to its primary resources but extremely sensitive to every fluctuation of the markets. Moreover, the Canadian national currency, which was long under-valued, has since 2005 acquired the status of a ‘ petro-currency,’ and its exchange rate has kept pace with that of the black gold.[15] One further noteworthy fact: the parity which the Canadian dollar reached with the US dollar for the first time in 31 years, all of which confirms the solid nature of the Canadian economy.

The ‘Saudi Alberta’ of the Americans

On 23 January 2007, during his State of the Union address, President George W. Bush touched on the question of his country’s energy dependence with respect to unstable nations and asked for Congress’s support to find new sources of supply in the world. At the same time, the Prime Minister of the province of Alberta, Ralph Klein, said he was ready to supply the Americans with oil coming from a nearby and stable region[16] north of the 49th parallel.

The United States would like to reduce its imports of hydrocarbons coming from the Middle East. Canada has thus become a godsend, all the more so as this country does not belong to the Organisation of Petroleum Exporting Countries (OPEC). Moreover, it enjoys political stability and a parliamentary system that protects it from political jolts.

Historically speaking, American petroleum dependence has undergone changes over time, but over the last 35 years a certain pattern has taken hold. First of all, the growth in imports and the rate of Washington’s oil dependence are not oriented towards the objective of preserving domestic reserves; rather they are motivated by a fall in world prices. Then the maintenance of prices at a low level has carried along this movement of substitution and reinforced it.

Since the start of the 1990s, there has appeared a strong trend: marginalisation of Persian Gulf imports. Indeed, Venezuela, Mexico and Canada have accelerated the growth of their production and their exports favouring interventionist policies and a wave of technological progress in export and production. Since then, oil from the Gulf has been somewhat supplanted, going from 25% in 1990 to 17% in 1996[17]. Progressively, America’s supplies have been focused on a regionalist approach via the Americas and that has been the case right up to President Bush’s speech in January 2007.

In accordance with NAFTA[18], in April 2001 Canada, Mexico and the United States set up a North American working group for the purpose of supporting the energy markets in the region, and it is principally Washington and Ottawa that are benefiting from this. This union has in fact allowed Washington to profit from primary resources at a very interesting price[19] inside NAFTA. It should be recalled that this agreement allows Canada to export all its resources without any additional tax compared to the price applied on its own territory, which renders this oil extremely affordable for the Americans.[20] The unfortunate consequence for the rest of the country is that it is impossible for Canada to create strategic reserves of oil to confront an oil shock. Indeed, just as NAFTA constrains Canada to sell most of its oil to the United States on a priority basis, some provinces like Quebec could run short in case of crisis, given that there is no East-West pipeline going all the way to Quebec and 90% of the supplies of oil for the East of the country depend on unstable foreign countries.[21]

Official statistics published in March 2008 by the American Administration reveal that for the 9th year in a row Canada is its number one supplier of oil. Presently Canada exports to the United States 78,814 million barrels/year, thereby running ahead of Saudi Arabia (47,806 million barrels), Mexico (42,211 million barrels), Nigeria (36,381 million barrels) and Venezuela (32,009 million barrels).[22] It should be noted that imports of Iraqi crude are presently 23,967 million barrels/year and have varied between 16 and 28 million barrels/year since 2000.[23] This should give people reason to reconsider the myth of Iraqi oil.

It is thanks to juxtaposition of Baghdad and Calgary that we should decipher the energy flows concerning the United States since 2003. In fact, beginning with the invasion of Iraq, the price of a barrel reached 35 US dollars, making extraction of oil from bituminous sands more than profitable; what we see is the end of the plan for an Iraqi oil boom, which has been ‘sent offshore’ to Alberta.

The Canadian-American marriage has been strengthened over the years and the imports from Canada have purely and simply doubled in 14 years, going from 43,118 million barrels/year to 88,536 million barrels/year in 2007.[24]

This American appetite suggests the overturning of bilateral relations, with the following direct consequences:

A) A rise in the power of Ottawa, which profits from the situation to settle commercial disputes between the two nations, such as the issue of timber, another important primary resource of Canada.[25] In 2005, at the peak of tension between the two countries, Condoleezza Rice went to Canada in order to resolve the disagreements.

B) After this period of turbulence was over, Canada finally agreed to an increase in its production of bituminous sands. In fact, according to the Canadian Association of Petroleum Producers (CAPP), in 2007 Canada extracted somewhat more than one million barrels per day of oil sands and plans to reach 2.7 million/day by 2015. By combining these projections with those of conventional and offshore reserves, total production is expected to exceed 4 millions barrels/day in this period.[26] Put another way, in the coming 7 years Canada will multiply its production by a factor of 4.

The situation of the United States’ energy dependence with respect to its neighbour becomes of capital importance, given that the demand also extends to natural gas as well as electricity produced in Canada. This country has become a ‘stand-in solution’ to the instability that reigns in the world at present. Moreover, the United States has been looming over the Canadian economy for many years, with all the implications that one can imagine and there is reason to say that Canada is in the American orbit.

A Canada that is not so green: the environmental impact

The Kyoto Protocol came into force on 16 February 2005. It commits the industrialised countries, but also those said to be ‘in transition’ to reduce their greenhouse gas emissions over the period 2008-2012. The signatory countries agreed to reduce their emissions by 5.5% compared to the level reached in 1990. As for Canada, it is committed to reaching a reduction of 6%.

The most recent numbers indicate, however, that this goal will not be reached and that, since 2006, the Harper Government has become more of a gravedigger for the Kyoto Protocol than its defender. In fact, a ‘green plan’ was presented to the Canadian Parliament for reducing by half the country’s greenhouse gases by the year 2050! But in truth Canada has seen its emissions grow by 30% since 1990, and the Alberta oil sector is the single factor responsible for this.

In these last two years, many studies have underlined the environmental damage caused by the abusive extraction operations on Alberta soil. At the present time, Canada has been unable to meet the Kyoto criteria, partly because of America’s energy appetite. This new petroleum Eldorado has a price, since the extraction of heavy oil implies expenditure of natural gas and water and emits gigantic quantities of greenhouse gases into the atmosphere. The extraction of a single barrel of oil generates around 125 kg of carbon dioxide and leads to the emission of many times its volume in spent water.[27]

At the start of 2008, the American position with respect to ecology changed and Congress ratified on January 4th an environment law called the ‘Energy Independence and Security Act of 2007.[28] This law provides in its 506 that federal agencies can no longer sign supply contracts for alternative fuels (such as bituminous sands) if they are more polluting than conventional sources of oil.

This law in no way interrupts the bilateral relations in energy matters, but it puts in place the basis for future agreements bearing on bituminous sands and will oblige petroleum companies to improve the production methods.

The environmental impact of Alberta bituminous sands has been considered to be more significant than that of the oil spill of the Exxon Valdez[29] in 1989. Just the polluting emissions of this sector could negate the efforts undertaken elsewhere in the country over the course of the next few years.[30] This state of affairs is easy to understand, since each barrel coming from bituminous sands is not only the product of three times more greenhouse gases than the traditional method but, in addition, burns the equivalent of five barrels of gas and uses up to five barrels of water per barrel of oil produced. The natural gas used in this way each day could heat three million houses and the spent water floods gigantic quarries that are visible from outer space.[31]

Canada would like to present itself as a green country, but the numbers tell us the contrary. In January 2008, the Yale Center for Environmental Law & Policy presented its annual report Environmental Performance Index at Davos, a report which classifies the land of the maple tree at the very bottom due to its dependence on fossil energy sources that are polluting and non-renewable.[32] Moreover, this report criticises the low use of wind, nuclear and solar energy at the national level.

Together with the United States, Canada is now the country which emits the most greenhouses gases per inhabitant in the world, but with one difference: the American cities and states are reacting to counter this trend. Thus, Los Angeles and Seattle have adopted plans to reduce emissions and concrete projects to fight climate change.[33]

Thus what we see is a new trend: while the residents of Alberta are waiting for the petroleum companies to make an effort, the Americans are demanding better management of production techniques in order to reduce greenhouse gases and the ecologists are finally beginning to be heard.

During the American presidential campaign that opens in September 2008, it will be interesting to see the statements made by the Republican candidate (John McCain) and the Democratic candidate (Barak Obama) with respect to energy independence. There is good reason to bet than none of the candidates will decide to modify the supplies coming from Canada for reasons of instability around the world.

On the one hand, the people of Alberta are aware that they are among the first to suffer from the consequences for the climate, environment and especially public health resulting from intensive oil production from bituminous sands. They have not failed to bring this to the attention of the Canadian Prime Minister John Harper, who was originally from this province. On the other hand, pressure from Washington makes itself felt as regards increased use of bio-fuels, and there are the good examples provided by states like California with respect to ecology and sustainable development. Finally the numbers brandished by the ecologists do not deceive: the Canadian ostrich cannot bury its head in the sands.

Canada is at a crossroads as regards its international positioning. While Calgary can become the new Kuwait City, Canada can become the new Saudi Arabia. The authorities in Ottawa will have to choose between the role of a green nation that it has always projected over the past century and its new vocation as a petroleum country with all its geopolitical and environmental consequences.

Conclusions

The notion of a Canada which plays the role of ‘ emerging energy superpower’ or of a ‘world scale mining giant’ has developed these past several years by the political authorities of the country in various circles including the G8. The country’s new international and energy posture is the result of this: Canada has become an unavoidable actor in the field of energy. But its foundations are fragile.

While the overall forecasts for petroleum production in the maple tree country are very optimistic, that is not the case for natural gas.

Put in other terms, by the year 2030 petroleum production will have more than doubled while at the same time Canada will no longer be a net exporter of natural gas and, in the total calculation, what it will have gained in the petroleum sector will be lost in the natural gas sector. This major decline in Canadian gas is also and above all linked in part to the growing use of natural gas in the extraction operations of oil sands.

Production of oil from bituminous sands is costly and thus extremely unstable because it is linked to variations in the market price of primary commodities. A fall in the price of oil could be economically discouraging for many projects now underway and above all could render Canada vulnerable and place it at the mercy of speculations about worldwide markets. Hence, the United States and especially Canada do not have an interest in the price of a barrel of oil falling below certain levels.[34]

The new, privileged relations between Washington and Ottawa over bituminous sands are not ready to come to an end. This de facto situation, combined with deregulation of energy markets, the integration of the North American economies and above all the existence of a North American free trade area (NAFTA) works in favour of close cooperation between the two countries.[35]

Canada has become a new power on the international scene and it is not ready to break the trend. Although the environmental damage in Alberta is nearly irreversible, it does not approach the colossal profits raked in by the authorities in Alberta and Ottawa. And this can explain why Canada will continue for many long years to exploit its bituminous sands.

It thus seems that the American-Canadian couple is taking ample advantage of its honeymoon, and for the decades to come Ottawa has chosen to be a very special petroleum country.

[1]Alberta, in the West of Canada, covers a surface area of 661,190 km².

[2] The bituminous sands of Canada, prospects and challenges up to the year 2015: an update, National Office of Energy, June 2006, Ottawa, p.ix.

[3] For a complete description of the extraction methods, we advise reading a work by Barry Glen Ferguson « Athabasca, Oil sands, Northern Resource Exploration, 1875-1951 », published in the Canadian Plains Research Center in 1985 (Alberta, p. 283).

[4] This technique was invented by the scholar Karl Adolf Clarck, who began his experiments in 1923. A Brief History of Oil, Nadine Mackenzie, Les éditions du Blé Saint-Boniface (Manitoba), 1993, p.97

[5] Investigation into the granting of licenses for long term operation of production from bituminous sands and exportation, National Office of Energy, dossier 8000-A000-13, 18 August 1993, Ottawa, p.11

[6] An improvement in extraction and operating technologies is the second condition for viability of oil production from bituminous sands.

[7] The bituminous sands of Canada, prospects and challenges up to the year 2015: an evaluation of the energy market in June 2006, Office of Energy of Canada, Ottawa, 2006, p.55.

[25] Pine timber is one of the principal exports from Canada to the United States. Since 2002, most of the Canadian companies exporting this material must pay nearly 1.3 billion Euros per year to American Customs to cover a new 27.22% tax imposed by the US Government.